Missed Opportunities for Married Couples Trying to Save
Written by: Allison Berger
We work with a lot of couples to help them plan for their long term goals. In some cases, we work with couples who keep their financial lives separate. Often this is the case with newlyweds who have yet to combine accounts and are not quite comfortable sharing all of their financial details with their spouse yet. It can even be the case with couples in their 50s and 60s who have kept separate accounts for many years.
In any case, planning for your financial future together is essential. Not only because financial issues are one of the leading causes of fighting in relationships, but also because planning separately can lead to significant missed opportunities that can negatively impact your wealth.
Below we list some of the common missed opportunities when married couples fail to take a holistic view of their financial picture:
Best Use of Retirement Contributions
If both spouses are employed, it is important to evaluate the retirement plans available from each employer. One may have a more generous match or very high costs. If you are not able to maximize contributions to all accounts yet, then it may make sense to fund one plan to a higher extent than the other. Investment choices are also fairly limited in employer sponsored plans, so one plan may have a great foreign choice while the other has low cost index funds or a generous fixed account. Looking at the whole picture together can allow you to build a more balanced portfolio while taking advantage of efficiencies that can boost your long term net worth.
Double Roth IRAs
Roth IRAs are the gold standard of savings accounts. Contributions go in after tax, growth is tax free, and withdrawals are completely tax free in retirement. You can also always withdraw your contributions tax and penalty free. This makes them a great tool for college savings and as back up emergency funds. However, in order to be eligible to contribute your AGI has to be <$184-194k for Married Filing Joint couples. In many cases we find that increasing retirement contributions a few percentage points, taking advantage of an HSA, FSA, or deferred compensation plan will bring a couple into eligibility for this valuable savings tool.
In some cases, when one spouse earns less than the other they can feel like they are not “contributing to the household” as much when their retirement contributions go up since their take home pay goes down. However, increasing retirement contributions in order to make Roth IRA contributions will have a net positive effect on their net worth. This is a very powerful tool to improve your long term financial situation.
Access to a 457 Plan
In the same vein as retirement contributions, certain employers (state or local government or tax-exempt organizations) offer access to a 457 plan for retirement. These plans are unique in that contributions to 457 plans are not classified as salary deferrals by the IRS. Therefore, if you participate in a 403b or 401k plan and a 457 plan you can contribute $18k to the 401k or 403b AND $18k to the 457 for a total of $36k pre-tax retirement contributions in one year ($24k/$48k for those over age 50). This can lead to a huge reduction in taxes now and put your retirement plan into hyper drive.
The problem is, most state and government workers, besides doctors and lawyers, don’t make enough money to defer that much toward retirement. But, they might have a spouse who makes a higher income. This might allow the lower earning spouse to defer the majority of their salary toward retirement pre-tax while the other spouse’s income supports the day to day expenses. For super savers, this may also bring you into Roth IRA eligibility, a savings trifecta.
So far we have discussed retirement contributions that can decrease your taxable income. There are also tax benefits that come with being married like writing off one spouse’s business losses on the joint tax return and leaving assets tax free to your spouse at death.
We all know that life insurance is necessary for young couples raising a family, particularly on the primary wage earner. It may also be important to hold a policy on a spouse who stays home with young children, since a premature death could necessitate additional expenses for the surviving spouse. Later in life insurance can also be used to allow for a higher lifetime payout from a company pension. In most cases pensions are offered with multiple choices for survivor benefits. These all come at a cost of course and if the pensioner is relatively healthy, holding a life insurance policy for present value of the income stream may be a cheaper option.
Social Security Claiming Strategies
Last but certainly not least is Social Security. This is definitely a financial decision you want to make as a couple. About a third of people claim benefits at age 62, but in many cases this leaves a lot of money on the table, particularly if there is an age difference between spouses. If one spouse has a longer life expectancy than the other, it may make sense for the higher earning spouse to delaying claiming benefits until age 70. This would allow the surviving spouse to receive that higher benefit over the course of their lifetime.
Social Security is also an important consideration for divorced spouses. If you were married for more than 10 years and never remarried, you are still eligible for benefits based on your spouse’s earnings history. This may be more beneficial than receiving your own benefits. You are also eligible to receive your ex-spouse’s full benefit upon their death. This is a benefit you do not want to miss out on.
Most Read IRIS Articles of the Week: April 17-21
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, April 17-21, 2017
Click the headline to read the full article. Enjoy!
Like so many others in the industry, I was wrong. For years, I was certain that the bull market was nearing its end. I thought the market was over-extended, and that, surely, the wild equities run was coming to an end. But everyone else was bullish, and perhaps rightfully so. And while I’ve watched equities continue on their spectacular rise, I do think now is the time (really!) to put a hedge in place. Here’s why. Here’s how. — Adam Patti
The realities for fixed income investors have changed. How is this being reflected in markets? Bond investing has become increasingly difficult over the past decade. Markets have been heavily distorted by ultra-low interest rates and quantitative easing, as well as by extreme risk aversion in response to the global economic crisis and the eurozone debt crisis. — Nick Gartside
Is being a financial advisor worth it? I am an optimistic person and I encourage other people to keep a positive mental attitude (shout-out to Napoleon Hill and W. Clement Stone). However, by taking a good, hard look at the negatives in life, we can successfully pivot towards the positive aspects that will help us achieve our goals. — James Pollard
How do you treat one of your most valued, existing clients? Here’s a list of some things that come to mind. — Andrew Sobel
According to many advisors I speak with, the only clients that leave are those who have died. And while attrition may not be a big problem in this industry, I have to assume that at least a few clients change advisors without doing so via the funeral home. — Julie Littlechild
I was talking with an advisor last week about how to get into conversations about what he does. He was relaying the story of going jogging with a friend who could be a good client but is, more importantly, connected to a large network of people who fit this advisors ideal client description. — Stephen Wershing
Big picture thinkers are not unicorns - rare and mystical. And they were not born with the innate ability to think big. They do, however, pay attention to the broader landscape and take the time to think, analyze and evaluate. — Jill Houtman and Danny Domenighini
Your reputation is who you are and how you show up, Monday to Monday®. Many of us take our image and reputation for granted. Give careful thought to the kind of reputation that you would be proud of Monday to Monday® and that would resonate with your purpose and priorities. — Stacey Hanke
The generational changing of the guard is a fact of life as old as time. Young replaces old in responsibility, importance, control and culture. Outside of the family, the workplace is perhaps where this is seen most regularly by most people. — Shirley Engelmeier
Next time you hear your prospects give you price objections, it’s not because of the price. The give price objections because they don’t know the full value proposition that they’d be paying for. And it’s not based on their need, or your features and functions. It’s based on the buying criteria they want to meet internally. — Sofia Carter
Last week we wrote about the economic rationale behind going independent vs. moving to another major firm as an employee. As a follow-up topic, we thought it prudent to analyze transition packages attached to big firm moves and peel back the layers of the onion to show the components of these deals. — Louis Diamond
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